2 weeks Ago
stockcam After a big IPO, Reddit, Inc. ( NYSE: RDDT ) soared to unthinkable heights. The social media company reported some impressive quarterly results , but the stock slumped due to the excessive valuation and now the company is facing the recent lock-up expiration following the Q2 '24 results.
My investment thesis is more Neutral on Reddit due to the valuation and likely headwinds of insiders unloading shares. Source: Finviz Massive User Surge As with any social media play, the user total and user growth is very key to the investment story. Reddit entered the IPO with a big push to expand an actively engaged, but relatively small user base, and the amounts have been impressive.
Reddit reported DAUs of 91.2 million for an impressive 51% growth rate, with nearly equal sizes and growth in the U.S.
market versus international markets. WAUs were up an even more impressive 57% to 342 million. Source: Reddit Q2'24 shareholder letter While the daily users aren't impressive in the social media space, Reddit does a solid job of highlighting the scale of the platform, with likely over 500 million that visit the site on a monthly basis.
The company does have an issue with monetizing users, with some 50% of users landing on the site due to clicking on links and not being logged-in users with data attributes to monetize. These logged-out users actually grew 74% YoY during the quarter. Reddit is working with the professional sports leagues to bring more content to the platform in a move that could boost usage in the near term.
The company already recorded a 10% sequential boost in comment views during Q2 a sign of the platform growth in line with the surging user counts. While the company technically reports an operational loss, Reddit produces solid adjusted EBITDA profits amounting to $39.5 million in Q2 alone.
The major non-cash charge is the $66.8 million for stock-based compensation that normally hits recent IPOs harder than most companies due to triggering events for going public. Source: Reddit Q2'24 earnings release The company would actually report a much larger adjusted profit when adding back in $20.
9 million in interest income due to the EBITDA metric excluding valid interest income. The true adjusted profits would be closer to $60.4 billion before considering taxes.
Lock-up Expiration The biggest issue facing the stock in the short term is the lock-up expiration that apparently ended 3 days after the Q2 '24 earnings report. Over 82% of the outstanding shares were subject to the lockup, and those shares are now free to be sold. The solid valuation is supportive of stock sales, and insiders immediately started unloading shares on August 9, exactly 3 days following the Q2 '24 earnings report .
CEO Steve Huffman has already sold nearly 125K shares, alongside a whole host of other executives unloading shares. Source: Finviz These ongoing sales will lead to some pressure on the stock going forward. The company only sold 22 million shares in the IPO at $34 and the lock-up expiration will greatly expand the float on the open market and contribute to lower prices.
Not to mention, selling shareholders already unloaded ~6.7 million shares initially and the current price of nearly $60 has to be vastly more appealing. After cooling down in the last couple of months, Reddit is much more reasonably priced now.
The stock is listed as running at a 6.8x multiple of EV/S target, but Reddit is much closer to a 9.0x forward EV/S targets using the higher diluted share count.
The stock is vastly more expensive than social media peers like Meta Platforms, Inc. ( META ) and Pinterest, Inc. ( PINS ) trading at 8x to 5x EV/S multiples, respectively.
Data by YCharts Reddit has a fully diluted share count of 205 million shares, leading to a market cap of $12.2 billion. With a $1.
7 billion cash balance, the EV is closer to $10.5 billion and revenue estimates are $1.2 billion for 2024.
The big question is the sustainability of the current user growth rate at 50%. Reddit has been growing DAUs by close to 10 million sequentially and this growth isn't sustainable, though the next couple of quarters could come with user growth rates topping 50% before the growth rates slow. Takeaway The key investor takeaway is that Reddit, Inc.
stock is now more fairly valued. The stock probably has limited upside from here, with insiders now unloading shares and the stock trading far above the IPO price. Investors should look for better entry points for Reddit and a price where insiders quit unloading the stock.
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Stone Fox Capital (aka Mark Holder) is a CPA with degrees in Accounting and Finance. He is also Series 65 licensed and has 30 years of investing experience, including 10 years as a portfolio manager. Out Fox The Street Learn more Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours.
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